Carl Icahn Takes $750 Million Stake In Women’s Healthcare Company Hologic

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Medical device maker Hologic Inc. on Thursday of last week announced its Board of Directors had approved a shareholder rights plan, a.k.a. poison pill, to take immediate effect for a one year period.

Hologic is in the women’s health care business and makes skeletal imaging systems, surgical products and diagnostic solutions for cervical cancer screening, molecular testing and cytology preparation.

Based in Bedford, Massachusetts where it employs 1, 800 people, Hologic earlier in the month, on November 11th, had issued its financial results for the year ending September 30th, and reported an almost US$1.2 billion net loss for the year – its fifth loss in six years, and one incurred albeit after a non-cash asset impairment charge of similar amount.

At the same time Hologic also issued forward revenue guidance for the new fiscal 2014 year as well, with numbers that are actually expected to be slightly lower than the final fiscal 2013 revenues it reported for the year of US$2.5 billion.

President and CEO John Cumming also indicated to financial analysts in a conference call that “fiscal 2014 will be a year of transition for the company” – whatever that means. Whatever it does mean, investors were not pleased and the shares immediately fell by 10 percent on the announcement falling from US$22.50 to around US$20.50 per share, not a radical drop to be sure but still something of a rap on the knuckles of management.

This kind of corporate weakness is just like waving a red rag in front of a bull for activist investor Carl Icahn, who has jumped in with investments in a troubled medical device company or two in the past as well.

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Accordingly, last week his companies are revealed in a Securities and Exchange Commission (SEC) Schedule 13D filing to have acquired over 34 million of Hologic’s shares, for an approximately 12.5% position in the company. Depending on his average price the stake may have cost him around a cool US$750 million dollars.

The market swooned initially on the news and immediately bid the shares back up again to US$22.75 per share, i.e. even a little more than they were before the company had announced its poor results and disappointing revenue forecast two weeks earlier. Yesterday the shares still closed at around US$22.50 giving the company a market capitalization of around US$6 billion.

The rapid announcement of a poison pill by the Hologic Board at close to the same time cannot be a coincidence, nor Icahn’s buying of shares a complete surprise to them as he will have notified them at some point. Therefore it must be taken as their formal response to Icahn’s initiative.

The way the plan works is that shareholders of record on December 2nd will receive one right for each of their common shares. Each right potentially allows a shareholder to buy “one ten-thousandth” of a share of a new series of participating preferred stock at an exercise price of US$107 per right for one year.

The neat trick is that these rights only become exercisable if any “active investor” acquires 10% or more of Hologic’s common shares, or any “passive institutional investors” acquire 15% or more. Also the participating preference share is really just a method, a cover, for the primary additional response that would potentially dilute down the holdings of predators, such as Icahn. The key sentence in the formal plan that accomplishes this is quoted in the Hologic press release which announces it, as follows:

“In all cases, rights held by any person or group whose actions trigger the Rights Plan would become void and not be exercisable.”

If that happens, then for everyone else each right then “entitles its owner to also purchase at the exercise price, a number of shares of Hologic’s common stock having a then-current market value of twice the exercise price.”

In addition, if Hologic merges into another company, an acquiring entity merges into Hologic or Hologic sells or transfers more than 50% of its consolidated assets or earning power, then each right will still entitle its holder to purchase, for the exercise price, a number of shares of common stock of the person engaging in the transaction having a then-current market value of twice the exercise price.

That is all complicated legalese for offering preferential rights to shareholders other than an unwelcome predator, which would dilute such a predator down if he/she crosses the stipulated thresholds and raise the price for him/her to continue to maintain pressure on the company, possibly to a level that makes it less attractive to proceed.

In the American system of corporate governance it is an effective approach to dealing with unwelcome activist shareholders, providing the balance of a company’s shareholder constituencies are broadly onside with the strategic goals of a company’s Board of Directors. If they are not then it doesn’t really help and at best may only postpone an otherwise inevitable difficult confrontation.

The SEC filings revealing Carl Icahn’s new shareholding also states that he intends to have conversations with members of Hologic’s management, to discuss ways to enhance shareholder value. Sounds like a plan to be sure; let’s hope they give him lunch…. and if they don’t turn the company around soon then instead of lunch, it might even be “toast”.

 

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